Announcer: Welcome to Creating Wealth with Jason Hartman, President of Platinum Properties Investor Network in Costa Mesa, California. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing, fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible.
Jason is a genuine self-made multimillionaire, who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it. And now, here’s your host, Jason Hartman, with the complete solution for real estate investors.
Jason Hartman: Before we start today’s show, I want to make a couple of very important announcements. Our twice yearly event, the Masters Weekend, a Gathering of Experts, on Saturday, March 7 and Sunday, March 8, so join us for these events.
So that’s what we do. Let’s get into the show now. I wanted to have you join in on a very impromptu discussion. A few minutes ago, one of our investment counselors, Sara, who is here with me – hi Sara – just walked into the office and introduced one of our clients, David Porter, who I’ll have on in just a moment here. And Sara wanted me to have him on the show because he has some very interesting metrics as to how to choose an investment property. So we’re going to hear about that in just a few minutes. Sara, thanks for bringing David in.
Sara: Sure. We are just getting ready to close some properties in Indianapolis or I should say David is getting ready to close some properties. He purchased some bank-owned properties with our local market specialist there and so far, he’s had a pretty good experience, but he definitely has his own metrics for choosing the specific properties to purchase and I would love to share it with all of you because I think it’s a really great idea.
Jason Hartman: Excellent. Well, Sara, we appreciate you doing that and I think you’ll find this a fairly interesting little quick chat. David, thanks so much for joining us with no notice whatsoever.
David: Well, surprise. It’s great to be here.
Jason Hartman: We’re glad to have you as a client and just want to hear a little bit before you tell us about one of your unique metrics in looking for properties, tell us a little bit about your background because it integrates into the concept of packaged commodities investing and global trade. And you have an interesting outlook on the global economy based on what you do for a living. So why don’t you tell us what you do.
David: Yeah, absolutely. Since 1988, for most of that time, I’ve been in international transportation. Basically, what my company does is provide the inland or the North American transportation for all the containers that are brought in from China, Malaysia, Singapore, Taiwan, Hong Kong, and so on and so forth.
Jason Hartman: A big part of what we do when we’re thinking about world trade. Obviously, the economy is pretty connected together around the world now and we have Maersk just three floors above us in our building, and they are closing the office here, subleasing their space. They’re a big shipping company that ships containers all around the world and business has slowed dramatically for them. Do you want to give us an outlook on what’s going on with container shipping?
David: Jason, what I’ve seen since 1988 is an explosion in the amount of transportation that we’ve been providing because those ports have just exploded. As you can witness, it’s impacting our traffic here in Southern California, for example. These trucks and containers are just absolutely everywhere.
Jason Hartman: And so you got into the business right when the global trade boom was really picking up in 1988 and then you saw it kind of peak and you changed careers.
David: What’s happened here with my capacity that I provide, which are the trucks and the rail equipment to bring these shipments inland, I had excess capacity of my trucks and rail equipment. I had to discount my prices because there wasn’t enough of these containers coming in in the late ‘80s and early ‘90s. That started to shift to the point where we would literally auction off our capacity because there weren’t enough of my services, of my trucks and containers, to bring all of these imported goods inland. We were in a shortage situation and my rates increased by about 100 percent. For me to provide my services, we were charging double from 1990 to say 2000. It increased exponentially almost.
Jason Hartman: Wow! So what we had happen during that time is we saw more free trade agreements. We saw more of an open, less protectionist policy, and we saw more of the Greenspan bubble, as he was just feeding credit into the system and just pumping insane amounts of money into the system through credit creation. Right now, we have that being done through creation of fake money, so it’s a different kind of pump now.
David: It’s interesting. In Southern California, we don’t have much of a manufacturing base anymore. Our manufacturing base in Southern California is called Tijuana in Mexicali and that’s where most people that live in the United States may not realize this, but all of your televisions are made either in Mexico, in what’s called the mequiladora section.
Jason Hartman: Last time I drove down there, which I wouldn’t dare do it today – the crime is outrageous. I mean Mexico has become another Columbia. It’s like a drug cartel country now. It’s amazing. You drive across that border and all you see is all these big corporate names right across the border from San Diego because the environmentalists have chased out all the manufacturing out of California. You can’t afford to do business here.
David: Example, they make a lot of furniture down there now. California chased them out because they didn’t want the lacquers and these emissions in the air. We saw large screen television sets, furniture, all that, we import all those goods from Mexico, and then all the other various other things that you see at Wal-Mart, Target, and other places, almost everywhere that’s coming in from these other Asian countries. That’s what we’re importing.
And that activity was huge. It was great for our business. In fact, I made pretty good money doing that for a number of years and as you were starting to ask me, after a while I went to work for my investment advisor. I was making money. I needed a place to invest, so I said okay. I liked what they were doing. I was also making a lot of money in the stock market at the time. And I said I want to be part of that, so I went to work for them.
Jason Hartman: Did you get a securities license and everything?
David: Yeah, I did the whole deal. So this was 2007 when I made this great move.
Jason Hartman: And you joined the vast Wall Street conspiracy.
David: Yeah, I guess you could say, yeah, with no evil intent, but I was part of it. Yeah, absolutely.
Jason Hartman: A lot of good people in that industry, but unfortunately, the overriding theme of that industry is it’s just a big scam.
David: Well, there are all levels of that. The thing that’s scary about it is you have no control. You don’t know what’s going on and in every day almost lately, literally, there’s some new revelation about these people thought they had their money invested and the guy actually never invested their money. The CFO did this or did that. It’s a scary thing. You lose a lot of control.
Jason Hartman: And certainly, you’re right, David. The difference with what we recommend and the other scams you see in the real estate industry are you see things where people join these partnerships or these tenant-in-common deals, and they lose control of their money. The thing I love about investing in income properties is you have a deed. You know you own it. You’re receiving the checks every month. The only intermediary party in there is really the property manager, who could rip you off, but the amount of damage they could do is so small, it’s no big deal. What are they going to do, mark up the cost of the repair of the garbage disposal and take a kickback of $25.00 from the repairman?
David: Well, interestingly, I was doing both at the same time. I mean while I had money invested in the stock market and I was an investment advisor for stock market investments, I also had rental properties. And the interesting difference about that is that my stock investments, they went way down. Some of the stocks in my mutual fund, I mean those companies don’t exist anymore.
And you know what? My property values went down, too, but you know what? My rents didn’t. And that’s what I really, really like about my investment properties is that cash flow actually increased. I took my rents up a little bit.
So my theory on investing in properties is I’m investing for the cash flow. The appreciation is the icing on the cake. I know I’ll get it sometime. I want to get it, but I’m not banking on that. I’m just investing for the cash flow.
Jason Hartman: In the meantime, if you did it right, you have a sustainable investment, so you’re never in a position where you’re forced to sell. And you know that’s really the key. Never be forced to sell at the wrong time. If the investment is self-sustaining, you’re never put in that position, so that’s good.
Okay, so you had your brief foray into securities and the stock market world and the Wall Street world, and then you got out of that and you came back into transportation.
David: Yeah, I went back into the transportation world.
Jason Hartman: And it changed quite a bit.
David: Things changed.
Jason Hartman: Now, why I’m having everybody hear this is that this is a firsthand outlook on what’s going on in the global economy.
David: Yeah, yeah, it is. So what’s happened, as Jason mentioned, within the building where Jason has his beautiful offices is Maersk. These people, in just recent years, very recent years, built and purchased tremendous investments in these giant container ships that can hold 10,000 of these steamship containers that you see at one time, and they’re just mothballing them because they don’t need them. The trade has collapsed. People, the United States consumer is tapped out. They’re not buying anymore.
And so what I talked about before, the rates were going up and up each year. Now, they’re coming down the other way because there’s excess capacity. I have excess capacity. These steamship lines have excess capacity. The factories in China have excess capacity. In fact, they’re closing many of them. So that’s what we’re seeing.
Jason Hartman: I just saw a thing recently and I don’t know if I mentioned it on the show before that 20 million or 26 million Chinese workers moving out of the cities, back to the countryside because they’ve just been laying off, closing down factories. I mean it is bad out there. No question about it.
David: And not even just the new kind of emerging economies of China, but even great names, Toyota of Japan, for example.
Jason Hartman: Toyota, for seven decades, Toyota never showed a loss and then last quarter was the first time. Toyota is a great company and even they’re having troubles.
David: Exactly because they now, too, have excess capacity. We’re in an era now of excess capacity.
Jason Hartman: Yeah. So what I call this in the housing world is the inventory hangover. And this inventory hangover represents huge opportunities for people because as we were talking, you follow commodities a bit, and what’s interesting here, everybody is there’s this huge gap between the market cost of something or the cost to replace something, and the situation where the value of what it really is. So we see this artificial deflation that I think is quite temporary, where we see a lot of funds, investment funds and so forth, unwinding positions, forced to sell things quickly to raise cash in order to stay afloat and stay in business in our lobby. If business got bad enough, I guess I’d sell those two big flat screen TVs in our lobby, right? Maybe some of our furniture and sell it for a lot less than it’s worth, right?
This is what’s going on around the world and overall, if you look at oil for example, it literally costs $70.00 a barrel to bring oil out of the ground. And oil is trading at what, about $44.00 last time I noticed.
David: Somewhere in that range, yes.
Jason Hartman: So you know that that cannot continue. This deflation is very artificial and it’s built on markets and speculation and shorting of markets and so forth. Tell us your thoughts about the packaged commodities investing and maybe you can share that experience also about what you mentioned about housing.
David: I purchased my first two properties through Platinum. They were in Indianapolis. And one is 3,500 square feet, five bedrooms, four years old. I purchased it for $85,000.00 and in the process of purchasing it, we had to get the insurance. So I went to the insurance company and I said hey, I have this property, gave him the specifics on it, and they said the insurance on it is going to be higher than what you expect. And I said well, why is that? Well, we’re going to have to insure it for $300,000.00.
Jason Hartman: Now, this is a big deal, folks. Everybody listening? How much did you pay for the house again?
Jason Hartman: $85,000.00 and your insurance company told you they would require you to take $300,000.00 of insurance on the house.
Jason Hartman: Wow!
David: And the rationale was they said, Dave, it seems like you got a really good deal here because it would cost about $300,000.00 to replace that property if something happened to it.
Jason Hartman: To rebuild the house. So if it burnt down, they’re saying – now, it’s 3,500 feet?
David: Yeah, so it kind of makes sense when you think about it.
Jason Hartman: So that’s less than $100.00 per foot. It’s probably – what’s that – maybe about $80.00, $70.00 a square foot, which is about the minimum cost of construction as we can tell. So you bought that property for potentially – now, this is not firm and I’m not saying you could sell it for that today, but potentially, the intrinsic value, if you will, of that property is $300,000.00, $215,000.00 more than you paid.
David: Yeah, in terms of when you talk about a basket of commodities, all the steel, the cement, and the wood, and appliances, all these types of things –
Jason Hartman: The glass, the lumber, the energy cost, the petroleum products in a house.
David: And the labor and all these things that go into producing the house is worth $300,000.00. Yeah, I could sell it for more than $85,000.00, but not $300,000.00. Eventually, I believe, and I don’t know how long it will take, that type of value will be realized. I believe that it has to be long term. These are scarce commodities. There’s so much steel that we can produce, for example, and there’s a huge demand for it all over the world. And so I kind of have it tied up on a nice piece of land in addition to that, in a beautiful neighborhood that has a PGA golf course nearby and it’s a very, very nice area. So yeah, it was very interesting to me.
Jason Hartman: As you were talking, I just got an email from Brittney, who is coordinating a lot of our properties, and a new property was uploaded to our website. It’s a foreclosure property in Indianapolis. And so this one, I’ll just tell our listeners real quickly; this is built in 2002, so it’s six years old basically, three bedrooms, two and a half baths, plus a loft, in Indianapolis. It’s a foreclosure, 1,700 square feet. It’s priced at $70,000.00. The cost per square foot here is only $41.00 per square foot.
Now, that sounds just like oil. Oil should be $70.00 per square foot, $80.00 a square foot, and here it’s $40.00 per square foot or so today. This house is the same thing because cost of construction should be $70.00 – $80.00 a foot, just like oil. It’s parallel to oil. It’s an interesting thing. And here they can buy it for $41.00 a square foot and it will rent, projected, for $1,000.00 a month.
David: Yeah, exactly, and to your point, I’m from the Midwest originally and I transplanted to California, so I might have a different view on the Midwest than you. But the people there, when you visit them, they love it there and they have a quality of life, while I personally – sounds like you – value the sunshine and the ocean and all that, they value uncongested streets, low crime, and they have certain qualities in their life that we don’t have that are just fabulous. And overall, a relatively low cost of living, too.
So they want to be there. It’s a great, great area, great schools, and so it works for them. Everybody has different needs and interests and there’s a great demand in Indianapolis for rental property.
Jason Hartman: Listen, I have to tell you. I’ve lived in California since I was five years old and I am really beginning to think California is about the most highly overrated state in the country. As you travel around to these other states, you just realize California just ain’t that great. Back in the ‘60s and ‘70s, when it was uncongested here, and that’s when California must have been great. But I think it’s largely riding on a reputation created 30 – 40 years ago.
David: Yeah, I think it is and not only importing televisions and other goods from Mexico and Asia, but the people are coming, too, and it’s making it very congested here.
Jason Hartman: Yeah, it definitely is. This property, the projected return on investment is 39 percent annually. Folks, are you listening? Don’t try this in a mutual fund. Thirty-nine percent annually – of course, that’s projected; of course, it may not work out that way, but look. What if it’s only half as good as projected? Then your rate of return is 19.5 percent. The total cash you’ll need to buy this property is about $22,000.00. That’s 25 percent down with closing costs and your monthly payment here; your property tax will be $105.00. Your mortgage payment is $284.00 a month. You’ll have $354.00 a month positive cash flow, if it happens as projected.
The downside risk here is very, very low. This property does need an estimated $8,700.00 in repair. No big deal. We have contractors go through all of these. Most of them are just pretty cosmetic in terms of what they need. Downside risk is very low. Tell us, David, about your kind of funny metric, which I like. When Sara brought him into the office, she said, Jason, you just have to hear this.
David: I’m an out-of-state investor living in California, investing in Indianapolis, so I’m trying to get a feel for these areas and the different areas within areas, too. A certain city can have all types of different demographics within it, and ideally, I’d like to invest in the best demographic area I possibly can, people that are more likely to be able to pay my rents on a continual basis.
So what I do is I go to the www.zillow.com website and I’ll put the address of the property in there. And if you do that and you scroll down far enough, it will show you the schools that you would go to if you lived in that house. Those are hyperlinks. You can double click the names of any of those schools and then it will go to another page and you scroll down, and it will show you all types of demographics of those students. And the one I kind of key in on is what percentage of the children at this school are getting free lunch or subsidized lunches.
Jason Hartman: Who says there’s no free lunch? I mean we’re going to call this “David’s Free Lunch Metric.”
“Dave’s Free Lunch.” Well, that’s the key thing and you can remember it that way, too. There is no free lunch. If 100 percent of the kids are getting free lunch, unless you’re specializing in Section 8 properties, then maybe you want to think twice about it. Some people love those properties and have done very well with them. That’s just not my thing.
Jason Hartman: My mother has and it’s not my thing either, but she made lots of money over the years doing Section 8. Just remember it’s a different business and if you want to be in that business, it’s a different kind of landlording. It’s a higher maintenance. You’ll have more collection problems. But certainly, there’s opportunity there.
David: You know what? There absolutely is and I have two other properties. I just bought two more through Platinum Network, so I’m a little bit of a newbie, and I wasn’t ready to go there yet. So what I like to see is something less than 50 percent of the children in a school getting free or subsidized lunch, and that indicates to me that the people in that neighborhood are probably going to have enough money to pay my rent.
Jason Hartman: That’s a great metric. That’s really, really interesting. So you get a sample there of what type of tenant you’re going to have. Is it going to be someone who’s depending on the state to feed them or is it going to be someone who’s resourceful enough to feed themselves? And if the state isn’t paying your rent, you better hope they’re resourceful enough to pay your rent.
David: Exactly, and I would just mention, too, it’s just an indicator. It’s part of the overall evaluation. I would still buy a property if it was over 50 percent, but it’s one of the things I like to take into consideration amongst many other things.
Jason Hartman: All right. Well, anything you’d like to say in closing?
David: The people that I’ve been introduced to, from Sara to Karen next door, the person that handles your organizational things around here.
Jason Hartman: Our Operations Manager here.
David: The people in the markets, to the financing people, property managers, and your local real estate experts, they’ve been just more than helpful. I mean seriously and that’s why I’m back for more. I’ll be buying more properties this month and as you point out, it’s a little bit of work upfront. Really, the work is upfront and later on, as with my other properties, it’s really not too bad, and the returns are just outstanding. The downside is – it’s not that significant. So I think it’s just a wonderful program. You’re doing a great service for people, so I would just like to add that.
Jason Hartman: Good, well, thank you so much. I appreciate it. And thanks for being on the show. I was going to produce a show today and I was going to talk about the ten or 12 biggest mistakes investors make, but now I can leave that until the next time.
David: Good to be on the show.
Jason Hartman: Thank you so much for being on the show.
Announcer 1: Copyright, the Heartland Media Company. All rights reserved. This show is designed to provide general advice and education concerning real estate for investment purposes. Nothing contained in this show should be considered personalized investment advice because every investor’s investment strategy and goals are unique. You should consult with a licensed real estate broker, agent, or other licensed investment advisor before relying on any information contained in this show.
The Heartland Media Company and/or its affiliates, such as Platinum Properties Investor Network, Incorporated, collectively HMC, have used its best efforts in preparing this content of the show. No guarantee is made as to the accuracy of its content contained in this show or the effectiveness of any strategy recommended or discussed. HMC is not responsible for errors and/or admissions in the contained show. The opinions of guests are their own.
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Likewise, rents are based on market conditions outside of the control of HMC and property owners. During periods of economic downturn or recession, rents can decrease as the number of qualified tenants decline or the number of rental properties on the market expands. There can be no assurances if the rents do fall, that they will shortly return to previous high levels.
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Duration: 25 minutes